Adjustable emissions caps and the price of pollution

Roweno J.R.K. Heijmans

Journal of Environmental Economics and Management, 2023, vol. 118, issue C

Abstract: Cap and trade schemes often use a policy of adjustable allowance supply with the intention to stabilize the market for allowances. We investigate whether these policies deliver with a focus on allowance prices. Motivated by existing policies, we study schemes that rely on either the allowance price (price measures) or the surplus of unused allowances (quantity measures) to adjust supply in a dynamic cap and trade market. Compared to emissions trading under a fixed cap, we find that price measures stabilize allowance prices. Quantity measures can be destabilizing. Though phrased in the context of changing interest rates, our results warn more generally against the belief that quantity measures are a suitable instrument to promote a stable cap and trade market.

Keywords: Emissions trading; Climate change; Interest rate; Market-based emissions regulation; Policy design (search for similar items in EconPapers)
JEL-codes: E61 H23 Q58 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:118:y:2023:i:c:s0095069623000116

DOI: 10.1016/j.jeem.2023.102793

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